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Stiff challenges for project developers

The coal industry faces stiff competition from gas, as utilities and investors prepare their power financing strategies for coming years. However, cheaper costs in Asia and the need to boost supply rapidly in countries such as Turkey and Germany, should provide support for the order books.

Rising costs have given those contemplating building coal-based independent power projects (IPPs) in the industrialised world plenty of food for thought recently.

“A coal plant has a massive capital cost disadvantage against gas, and that’s something that has been exacerbated in the last five years,” Guy Doyle, chief energy economist at engineering consultancy Mott Macdonald says.

In Western nations, the premium payable for coal capacity over combined cycle gas turbine (CGGT) capacity in terms of engineering, procurement and construction (EPC) costs leapt from around $500/kilowatt (kW) before 2006 to almost $2,000/kW in 2008, Mott Macdonald estimates. That margin has narrowed slightly to around $1,500/kW today, but it still provides a formidable obstacle for coal to overcome.

“All this means coal needs a significant fuel price advantage over gas,” Doyle told the Coaltrans World Coal Conference in Madrid, held in mid-October. At present that is not the case. Based on levelised costs, including fuel, the consultancy calculates a new coal plant is priced at a premium of around $25-30/megawatt-hour (MWh) over gas, based on a thermal coal price of $100/ton and a gas price of $7.50/million BTU – that is slightly less than the price either fuel trades for in Europe at present.

With forecasters, such as the International Energy Agency, suggesting coal and gas prices are likely to move broadly in alignment in coming years, there is little prospect that coal is going to gain a competitive edge on this basis, he suggests.

Coal is also likely to come under pressure due to a number of other factors. Plants designed to last several decades are increasingly going to need to take into account the need to include carbon capture and storage (CCS) technology – an undertaking that will probably be a more expensive undertaking for coal than for gas. Meanwhile, permitting rules for coal are getting tougher in many countries and financial institutions are also tightening up their conditions for lending to coal projects, insisting that more costly high performance, low emissions technology is used.

Asian demand

However, the situation is far from uniform for the coal industry. The landscape looks very different in Asian markets, where coal is likely to remain more competitive given access to lower cost Chinese and Korean equipment makers and reduced labour costs – those factors can make coal plants 30-40% or more cheaper to build there than they would be in Western markets. The continuing rapid growth in coal-fired capacity in China and India bears testament to the attractive economics in that region.

Coal also has a role to play in ensuring that utilities have a diversified portfolio of energy sources available. Gas plants may be cheaper, but no utility wants to have all its eggs in one basket, as global competition for gas supply intensifies.

That consideration weighs on decision-making even in the gas and oil-rich Middle East. While coal may not seem an obvious fuel of choice in the United Arab Emirates, the Dubai Electricity and Water Authority (DEWA) has been investigating the potential to build its first coal-fired power station to help offset a potential energy shortfall before nuclear plants come on line there in several years’ time. The Emirate had originally been looking at building a 1.5 gigawatt (GW) plant based on clean coal technology, but said in June that it was now considering doubling the capacity of the plant. Ras Al Khaimah, another of the country’s emirates, has said it plans to build a 600MW coal-fired plant.

Turkey’s growing power needs

Given the disadvantages coal faces in the Gulf region compared to other feedstock, analysts have questioned whether Dubai will eventually decide on coal. However, not far away, in Turkey, the biggest economy in its region, coal from IPPs is set to play a central role in the country’s ambitious power sector plans.

Power capacity in Turkey, which plays host to next year’s Coaltrans World Coal Conference, is projected to rise to around 90GW by 2020, nearly double the 48GW in place in 2010. That will require a substantial ramping up of generation from all sources, but coal from IPPs looks set to play a central role, adding to the growing need for imports to supplement indigenous coal reserves.

At the Coaltrans conference in Madrid, Sirri Uyanik, general manager of ISKEN – which runs the first coal-fired power plant in Turkey to be financed by private and foreign investment – highlighted the potential for rapid growth in the sector.

Power capacity based on imported coal currently stands at around 3.2GW, but that is estimated to expand by a further 7.7GW, when plants under construction, licensed or likely to win licences, come on stream, he said. And there will be more to come if Turkey is to meet growth in electricity consumption projected at around 7 percent a year. That could mean the country will need to boost capacity from import-based coal-fired power projects by around 800MW/year, potentially enabling Turkey to pull in 24 million tons/year of coal imports by 2020, nearly three times the present import level.

ISKEN, which is 51%-owned by Germany’s STEAG, started operating in 2004 and now contributes 1.32GW – around 5 percent – of Turkish power demand. It imports more than 3 million tons of coal a year, of which around 80 percent comes from Colombia with most of the rest coming from South Africa. The $1.5 billion it required to build was the largest ever foreign investment in Turkey at the time it was developed.

Germany’s mixed outlook

STEAG itself is the fifth largest electricity generator in Germany with an installed capacity of 7GW from nine coal-fired plants around the country. The company and the rest of the German coal sector are set to benefit from the German government’s decision to phase out the country’s nuclear power plants by 2022, given rising safety concerns in the wake of Japan’s Fukushima nuclear plant disaster in March. That could lead to further expansion of coal-fired capacity in a country where coal remains key to meeting energy needs.

Franz-Josef Wodopia, chief executive of the German Coal Association, told the Coaltrans conference that coal should be considered an important part of the post-nuclear energy mix, given improving emissions technology and the important role that the fuel could play in providing energy security.

Coal and lignite still account for more than 20 percent of Germany’s primary energy consumption and well over half the primary energy production in the country. Given the need to boost energy security and maintain diversified energy supplies, there was a strong case for more investment in coal, he argued.

A string of new coal-based power projects being developed in Germany may now push ahead more rapidly as a result of the nuclear phase out. However, the potential for coal project development in Germany is still likely to weaken over time, assuming the country maintains its plans to place more emphasis on cleaner renewables and gas. If those plans are implemented, Germany could be meeting just 11 percent of its primary energy consumption through coal and lignite by 2030, compared to 24% in 2008, Wodopia warned.

This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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